Question

A mine is for sale for $300,000. It is believed the mine will produce a profit of $65,000 the first year, but the profit will decline $5,000 a year after that, eventually reaching 0. Assuming salvage value of $10,000, what is the rate of return of this investment? Please solve using Excel if possible.

Answer 1

Ans Lets prepare the cash flw first Year Purchase Pri Revenue Salvage Val Nel Cashflow 0 (300,000) (300,000 1 65000 65,000 2 60000 60,000 3 55000 55,000 4 50000 50,000 5 45000 45,000 6 40000 40.000 7 35000 35,000 8 30000 30,000 9 25000 25,000 10 20000 20.000 11 15000 15.000 12 10000 10,000 13 10,000 15,000 5000 We can compute the rate of return using the IRR formula and apply to cashflow table IRR 1024 IRR Formula : IRR(CFO CF13)

Ans Lets prepare the cash flw first Year 1 Purchase PricRevenue Salvage ValuNet Cashflow 0 (300,000) (300,000) 65000 65,000 2 60000 60,000 3 55000 55,000 4 50000 50,000 5 45000 45,000 6 40000 40,000 35000 35,000 8 30000 30,000 9 25000 25,000 10 20000 20,000 11 15000 15,000 12 10000 10,000 13 5000 10,000 15,000 7 We can compute the rate of return using the IRR formula and apply it to cashflow table IRR 10% IRR Formula : IRR(CFO:CF13) Note : Salvage value will realise in year 13, its one time cash inflow. In this calculation it is discounted to present day (Year O) There is no need to fund the annual value of the salvage value.

Ans Lets prepare the cash flw first Year Purchase Pri Revenue Salvage Val Nel Cashflow 0 (300,000) (300,000 1 65000 65,000 2 60000 60,000 3 55000 55,000 4 50000 50,000 5 45000 45,000 6 40000 40.000 7 35000 35,000 8 30000 30,000 9 25000 25,000 10 20000 20.000 11 15000 15.000 12 10000 10,000 13 10,000 15,000 5000 We can compute the rate of return using the IRR formula and apply to cashflow table IRR 1024 IRR Formula : IRR(CFO CF13)